The persistency ratio measures the proportion of policyholders who continue paying renewal premiums and keep their policies active. Insurers typically track it at the 13th, 25th, 37th and 61st months. “High persistency indicates that customers find value in their policies,” says Venkatesh Naidu, director, Insurance Brokers Association of India.
Assess the need for term cover
Term insurance can provide substantially higher cover at a lower premium than a savings-linked plan. It is relevant when family members depend on the buyer’s income, or when the buyer has outstanding loans and other long-term financial obligations. “Customers should assess whether their family would face financial hardship if their income stopped,” says Naidu.
“It is especially relevant for people with young children and ageing parents,” says Alok Rungta, managing director and chief executive officer, Generali Central Life Insurance.
Select a suitable term plan
Buyers should first ensure that the cover amount is adequate. It should be sufficient to replace the policyholder’s income, repay existing liabilities and fund major future goals. “A minimum cover of 10 times annual income may help the family meet expenses for the next 10 years,” says Shilpa Arora, co-founder and chief operating officer, Insurance Samadhan.
Next, customers should select the appropriate policy term. “The policy term should cover the years during which the family will remain dependent on the policyholder’s income,” says Rungta.
The premium payment period requires careful evaluation. “Limited-pay plans carry higher premiums, so it is advisable to consider a regular premium plan,” says Arora.
Monthly premiums may appear less burdensome than an annual payment, but buyers should weigh their drawbacks. “Monthly premium payments may cost more than annual payments. They also increase the risk of the policy lapsing if the customer misses an instalment,” says Arora.
Be careful while choosing the policy term. “Avoid extending the policy beyond age 65 without examining the impact on premiums,” says Arora.
Add only riders that meet a genuine need. Consider buying disability and critical illness riders.
Who should buy an endowment plan?
Endowment plans may suit customers who do not wish to take equity risk through mutual funds. When combined with a premium-waiver rider, they can help ensure that the goal for which money is being invested is met even if the parent is not around.
Buyers who would be satisfied with single-digit returns may opt for them. “An endowment plan should be selected for financial discipline and certainty of outcome rather than to maximise returns,” says Naidu.
Key parameters to check
Calculate the policy’s expected internal rate of return (IRR). “The internal rate of return can help customers compare the policy with other investments of the same duration,” says Abhishek Kumar, Securities and Exchange Board of India (Sebi)-registered investment adviser and founder, SahajMoney.com. This comparison can help them make a more informed choice.
Endowment plan premiums are much higher than term insurance premiums. “Customers should assess whether they can comfortably pay the premium throughout the policy term,” says Rungta.
Customers should also understand the plan’s liquidity provisions and the conditions attached to surrendering it.
Buyers should determine whether the product is a participating plan, whose returns are linked to the insurer’s investment performance, or a non-participating plan, which delivers the returns promised at the time of purchase.
“Look for features that support policy continuation during a premium break caused by financial difficulties,” says Maneesh Mishra, chief product officer, Bandhan Life.
Unit-linked insurance plans (ULIPs) suit customers who understand market risk. “Evaluate whether you have the risk appetite to withstand market volatility,” says Kumar.
These products require a long investment horizon of seven to 10 years. Buyers must also factor in the five-year lock-in period and ensure that it matches their liquidity needs.
Age affects both ULIPs and endowment plans. Older buyers pay a higher premium because life cover costs more for them.
Before purchasing a ULIP, customers should also decide whether they want to combine insurance and investment. “They should compare a ULIP with the alternative of keeping term insurance and mutual fund investments separate,” says Kumar.
Choose the right funds
The selection of underlying ULIP funds should reflect the customer’s risk appetite. “Divide the premium between equity and debt funds based on risk appetite,” says Mishra. Also assess the performance of the insurer’s underlying funds.
Finally, examine the full cost structure. “Examine premium allocation charges, policy administration charges, fund management charges, and mortality charges,” says Kumar.
The writer is a Mumbai-based independent journalist.
